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Consumption smoothing among working-class American families before social insurance

  • Michael G. Palumbo
  • John A. James
  • Mark Thomas

This paper examines whether the saving decisions of a large sample of working-class American families around the turn of the twentieth century are consistent with consumption smoothing tendencies in the spirit of the permanent income hypothesis. We develop two econometric models to decompose reported annual incomes from micro-data into expected and unexpected components, then we estimate marginal propensities to save out of each component of income. The two methodologies deliver similar regression estimates and reveal empirical patterns consistent with those reported in other recent research based on quite different contemporary household data. Marginal propensities to save out of unexpected income shocks are large relative to propensities based on expected income movements, though the former lie much below one and the latter much above zero. While these data reject strict parameterizations of the permanent income hypothesis, we nonetheless conclude that families' saving decisions in the historical period look quite "modern."

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-24.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-24
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  1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  2. Marjorie A. Flavin, 1991. "The Joint Consumption/Asset Demand Decision: A Case Study in Robust Estimation," NBER Working Papers 3802, National Bureau of Economic Research, Inc.
  3. James, John A, 1993. "Changes in Economic Instability in 19th-Century America," American Economic Review, American Economic Association, vol. 83(4), pages 710-31, September.
  4. Kantor, Shawn Everett & Fishback, Price V, 1996. "Precautionary Saving, Insurance, and the Origins of Workers' Compensation," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 419-42, April.
  5. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, March.
  6. repec:cup:cbooks:9780521297677 is not listed on IDEAS
  7. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1993. "The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving," NBER Working Papers 4516, National Bureau of Economic Research, Inc.
  8. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
  9. Olney, Martha L., 1998. "When Your Word Is Not Enough: Race, Collateral, and Household Credit," The Journal of Economic History, Cambridge University Press, vol. 58(02), pages 408-431, June.
  10. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
  11. Luigi Pistaferri, 2001. "Superior Information, Income Shocks, And The Permanent Income Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 465-476, August.
  12. Carter, Susan B. & Sutch, Richard, 1996. "Myth of the Industrial Scrap Heap: A Revisionist View of Turn-of-the-Century American Retirement," The Journal of Economic History, Cambridge University Press, vol. 56(01), pages 5-38, March.
  13. Palumbo, M.G., 1998. "Estimating the Effects of Earnings Uncertainty on Families's Saving and Insurance Decisions," Papers 98-07, Houston - Department of Economics.
  14. Romer, Christina, 1986. "Spurious Volatility in Historical Unemployment Data," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 1-37, February.
  15. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
  16. Alessie, Rob & Lusardi, Annamaria, 1997. "Saving and income smoothing: Evidence from panel data," European Economic Review, Elsevier, vol. 41(7), pages 1251-1279, July.
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